Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Bubble”
A Bubble begins when the price of an asset rises far higher than can be explained by
fundamentals, such as the income likely to derive from holding the asset. The Chicago
Tribune of April 13th 1890, writing about the then mania in real-estate prices, described
"men who bought property at prices they knew perfectly well were fictitious, but who were
prepared to pay such prices simply because they knew that some still greater fool could
be depended on to take the property off their hands and leave them with a profit". Such
behavior is a feature of all bubbles. Famous bubbles include tulip mania in Holland
during the 17th century, when the prices of tulip bulbs reached unheard of levels, and
the South Sea Bubble in Britain a century later, although there have been many others
since, including the dotcom bubble in internet company shares that burst in 2000. Economists
argue about whether bubbles are the result of irrational crowd behavior perhaps coupled
with exploitation of the gullible masses by some savvy speculators or, instead, are the
result of rational decisions by people who have only limited information about the fundamental
value of an asset and thus for whom it may be quite sensible to assume the market price
is sound. Whatever their cause, bubbles do not last forever and often end not with a
pop but with a crash.